Is China Ready for 2012?

By Damien Ma

The Chinese leadership will face daunting challenges in the coming year

Reuters

It is appropriate that the year began with the Tiger Mom and closed with an official indictment of the management of the Chinese high-speed rail program. The book ends of this year's China narrative capture the zeitgeist in 2011: the ever fiercer duels between the China bulls and bears. Yes, Amy Chua is American, but her story became instantly linked to the general competitive fears that Americans had about what appeared to be an unstoppable juggernaut -- perhaps one of the most overused nouns in describing China. From raising future Ivy Leaguers to clocking the fastest bullet trains, the Chinese can do it all and with exacting efficiency. It was a year in which many latched onto the China story, many more traveled to China for days or weeks and commented on it, and many used the country as a reflection of America's own debilitating dysfunctions. A "juggernaut" it may be, but China's size is also its curse. The country is no longer under the proprietary province of China specialists -- it is now subject to Saturday Night Live parodies and Gary Shteyngart's literary satire. For better or worse, 2011 saw the democratization of the China narrative.

This debate is due in large part a consequence of this democratization, leading to a proliferation of "takes" on China that make it difficult to separate the good from the bad. Each camp can marshal enough evidence to support their respective cases. To be sure, the China bulls had plenty of ammunition entering into 2011. China was the indisputable growth engine in the wake of the financial crisis, just as the Eurozone was lurching from fiscal to political crises and the U.S. faced abysmal employment figures. Formally assuming the #2 spot in the global economy, China took on some swagger. President Hu Jintao's January state visit in Washington was popularly viewed as a debt-collection exercise (call that the "SNL effect"). I recall watching Hu's motorcade, regaled in Chinese flags, descending Connecticut Avenue as a random passerby quipped, "you know what that means, he's gonna want his money back."

Of course, Hu wasn't asking for his money back and in fact continued to pile China's foreign exchange reserves into U.S. Treasuries as the export sector boomed amid a global downturn. Yet support for an export-led strategy had already waned and was clearly de-prioritized as Beijing finally unveiled its long-awaited 12th Five-Year Plan in March, as I have previously discussed. (Also see here, here, and here.) The rebalancing agenda incorporates a major effort to restructure China's energy landscape, including a commitment to nuclear energy. And so, despite initial concerns over the prospects of China's nuclear program in the immediate aftermath of the tragic Fukushima disaster, China never intended to ditch its ambitious program. The Chinese position lent some cheers for those hoping for a nuclear renaissance.

Things appeared rather swell, even as the perception on China began to shift. For the next several months, China was walloped by investor bears, who overwhelmed the bulls. Few were as colorful as investor guru Jim Chanos in describing China as running on a "treadmill to hell". But the compounded effect of stubbornly high inflation, a clampdown on the property sector, cleaning up the stimulus hangover, a deadly bullet train crash, and embarrassing discoveries of fraudulent Chinese IPOs all made China appear much more wobbly than many had thought. And all of this took place as the Arab Spring reached a crescendo, prompting the arrest of activist Ai Weiwei -- the Liu Xiaobo of 2011 -- and as the mood over Eurozone prospects grew darker than ever. "Pork prices," "ghost cities," "hard landing," "political repression," and "debt-laden local governments" became the watch words for the rest of the year.

So did the Beijing mandarins over-tighten as it was heading into a double dip because of Europe? In other words, was China repeating the mistakes of the 2007-08 period? For markets, China was the remaining leg in the tripod of global growth -- the other two being the U.S. and EU -- and any sputtering of its economic engine could prove disastrous. Beijing responded by signaling a looser fiscal and monetary policy to put a floor on growth, even as it is determined to keep the screws tight on the housing market to prevent another bout of irrational exuberance. Why? Because despite the preference for full-throttle growth by some, the Chinese public still ranked inflation and housing prices as top issues in 2011, according to a recent survey by an influential state think tank (h/t China Smack):

Indeed, nearly 60 percent of respondents believe that inflation was the #1 issue, while housing costs ranked #6. Healthcare and education costs, employment, social security, wealth gap, and corruption all made the top ten. These are largely bread-and-butter issues that have little to do with demanding Western-style political liberalization, though corruption and the income gap would require political solutions. What transpired in "Occupy Wukan" over the last month or so was not an urgent demand for democracy, but is emblematic of the worsening rural-urban divide and local government malfeasance. Wukan alone won't bring down the Chinese government, but the two structural maladies, if left untreated, could, not least because they have before.

That is precisely what the rebalancing agenda seeks to solve. It is meant to rescue the party-state from defeating itself by allowing these problems to fester. I think what I wrote in last year's wrap-up remains valid as we head into 2012:

...But the outstanding question remains whether China's leaders will pursue the right policies with the kind of urgency necessary. Major economic adjustments are usually never pleasant, and most leaders would prefer to minimize the pain on the largest swath of the population possible during that process. The Chinese are no different in this regard, but how much heavy-lifting can they tolerate?

Yu and a similarly reform-minded lot are advocating temerity over timidity, likely in a bid to influence the direction of debate as there are forces inevitably arrayed against them. Plenty of interests in China eschew these changes that will involve taking away some of their wealth, likely prompting a vigorous defense of the status quo...

To me, one of the biggest questions next year is whether China can create the necessary political conditions, amid one of the most important transitions in a decade, to forge ahead with its restructuring. With the anticipated slow down in growth and a shrinking export surplus, there appears to be an opportunity to steer the ship of state in a different direction. Yet with a political leadership still unsettled, I find it hard to be optimistic over the extent of progress next year. But I am fully open to being surprised.